Home value growth will slow to around 3 percent per year instead of the 6 percent seen recently, and that will make real estate less attractive to many investors, says Stan Humphries, chief economist for Zillow.

Stan Humphries, chief economist for Zillow, gives his 2015 predictions for real estate growth for real estate investors

Stan Humphries, Zillow chief economist, gives his predictions for 2015 for real estate investors.

“It’s been a tough market for home buyers,” Humphries said in a story in U.S. News. “I think it’s going to get easier in 2015. Negotiating power will move back to buyers and away from sellers. It will be a much more balanced market.”

Redfin.com’s chief economist Nela Richardson said in the same article, “It’s been a clear pattern that the investor activity has been shrinking over time. Investors like to go in where they can buy low and sell high. Price growth is starting to slow dramatically, so they can’t sell much higher than what they buy. Investment property is less compelling in 2014 going into 2015.”

More inventory and less competition from investors means even traditional buyers are becoming “more picky, and they’re willing to let a home go if they don’t think it’s a good fit for them,” Richardson said. “Buyers are less worried that they’ll miss out on something. Houses are more like buses now. If you miss one, another one will come along.”

For a host of reasons, 2015 is shaping up to be a good year for home buyers—particularly younger and first-time buyers, Humphries said on Zillow.  More inventory, rising rents and changing demographics will all contribute to more balance in the market between buyers and sellers next year, after years in which sellers were largely in the driver’s seat. Below are Zillow’s official predictions for real estate in 2015:
• Growth in U.S. rents will outpace growth in home values by the end of the year.
• Millennials will overtake Generation X as the largest group of homebuyers.
• Builders will begin constructing more, less-expensive homes.
• Homebuyers will have more negotiating power in 2015.
How will all of this play out? Each prediction ties into the next. Here is his commentary:

Growth in rents will outpace home values

After peaking at an annual pace of 8.3 percent in April, home value growth has slowed in every month since, falling to 6.4 percent by October. This pace is expected to continue to fall, to about 2.5 percent by the end of 2015, much more in line with historical growth rates in home values and a sign the for-sale market is continuing its march back to normal.

But at the same time growth in home values has been slowing, growth in rents has been accelerating. After dipping to a 2014-low of 2.3 percent annual growth in May, the pace of annual rental growth has risen or stayed flat in every month since, up to 3.5 percent in October. Zillow expects rents to continue growing at that pace through 2015.

Rental demand is skyrocketing, thanks to a combination of younger workers staying in rental housing longer and families turning to the rental market after losing their homes to foreclosure during the recession. Builders are doing what they can to keep up, but it can take a while to get large multi-family projects off the ground, and demand is very hot right now.

So what does this mean for buyers? In a word, affordability. In the second-quarter, for-sale homes in the United States were roughly 30 percent less expensive (in terms of the share of income needed to afford the mortgage on a typical home) than they were in the pre-bubble years between 1985 and 2000. But rental homes were almost 20 percent more expensive. Continued growth in rents, combined with a slowdown in home value appreciation, will mean this trend will only continue into 2015.

For current renters who can afford a down payment and can find a home they can afford, buying will look increasingly attractive next year.

Millennials Will Overtake Gen X as the Largest Home-buying Age Group

Contrary to popular opinion, Millennials (buyers aged 23 to 34) actually do want to buy homes. And current Millennial renters are more optimistic than other generations that they will eventually be able to afford a home. So a lack of desire or confidence is not why these younger potential buyers have not been buying homes.

Instead, the answer has much more to do with demographics: Millennials have been delaying getting married and having children, the two main drivers for first-time home purchases. But life catches up to everyone, and as this group ages, they will begin to settle down and start buying homes en masse. Being the largest generation in the country, Millennials also have numbers on their side.

Finally, the rising rents mentioned above will force current young renters—no matter how content they are renting—to consider buying a home, if only to keep their monthly payments fixed. Given lifestyle preferences, it’s possible and maybe even likely that these home purchases could lean more toward condos or townhomes located closer to city centers, and away from suburban subdivisions and single-family cul-de-sac communities.

Whatever the type of home purchased, there will be a shift among this group toward homeownership, and away from renting. In many areas, the gap between the homeownership rate of millennials and older Baby Boomers is already quite narrow relative to other places, including large markets like Las Vegas and Fresno, California.

Builders will build more, less-expensive homes

In general, home builders appear to have made a tradeoff in recent years: To sell fewer, more-expensive homes instead of selling more, less-expensive homes.

Currently, newly constructed homes command a roughly $75,000 premium over existing homes, putting a new home out of reach for many would-be first-time buyers. Additionally, even though inventory of for-sale homes is up overall, in many markets inventory at the lower end of the market is far more constrained than at the higher end.

Take Denver, for example. In October, there were almost four times as many homes available for sale in the Denver metro in the upper price tier (priced at $357,900 or more) than there were homes priced in the lowest price tier (less than $219,000). The same pattern held true in many other markets, as well. Dallas, Atlanta, Phoenix and Nashville all had at least two times more homes for sale in the top tier than the bottom tier in October.

But we at Zillow expect more bottom-tier inventory to come on line over the next year, and a lot of that will come from builders turning their attention away from the upper part of the market and toward the lower end, particularly as more Millennials enter the market, as noted above. New home sales volume has been stuck around the 450,000 per year mark. In order to break out and get that number above 500,000, builders are going to have to start to build cheaper homes, which will help to narrow the price gap between new and existing homes and contribute to more rapid inventory gains both overall and at the lower end of the market.

Home buyers will have more leverage overall in the market

For all of the reasons outlined above, buyers in general will have more negotiating power in the market. In many ways, conditions have been ripe for buyers for several years: Home affordability is very high, thanks to home values that remain almost 10 percent off their pre-recession peaks and mortgage interest rates that remain near all-time lows. What’s been missing has been inventory of for-sale homes, both from a lack of sellers and because investors and all-cash buyers scooped up thousands of properties in the wake of the foreclosure crisis, and have not begun selling them off yet at a sufficient pace to keep up with demand.

But inventory is coming back, and will gather even more momentum as builders ramp back up. As a result, instead of buyers feeling the competitive heat and engaging in bidding wars to the benefit of sellers, that pressure will instead shift to sellers competing with the home down the block for offers and attention. This will lead to price cuts, which will help keep homes affordable for more buyers.
We’re already seeing this occur. Roughly 37.4 percent of all U.S. listings on Zillow had at least one price cut in October, up from 34 percent at the same time last year. The median price cut nationwide was about 5.4 percent in October, or more than $9,500 based on the October median home value of $177,500.
More selection, better deals and continued low mortgage rates, coupled with an increasingly difficult rental environment, will help bring balance to 2015 and result in smoother sailing for everyone as they enter the housing market.

Read the full Zillow 2015 predictions by Stan Humphries here.

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